All that’s left for investors now when it comes to earnings season is the shouting, but if the rest of the retailers post results anything like Kate Spade did on Tuesday, the shouts will be screams of terror rather than anything that assuages investors over the state of the overall economy. Kate Spade’s executives went into some detail on its conference call as to the nature of its margins shortfall – which Belus Capital chief equity strategist and longtime retail analyst Brian Sozzi said are not likely to improve until the middle of 2015 – and the company then did itself no favors by declaring that it wouldn’t be discussing the margin issues any further on the call. (Craig Leavitt, the CEO, violated that rule to some degree, but basically, investors don’t like it when you tell them flat-out that you’re not going to talk about your problems, and when you’re a company with a forward price-to-earnings ratio of 77.5 and a price-to-book value of 119, that’s going to be particularly true.)
Other luxury retailers have noted their own problems with attracting customers at this time, including Michael Kors Holdings, which saw its own shares stumble of late after also warning of margin pressures due to expansion in Europe, but at least Kors has a forward P/E ratio around 19, which puts it in line with peers like Coach and Ralph Lauren.
After Macy’s, which reported this morning – and put some ugly numbers out there
- the next big retailers out of the gate are Kohl’s, Nordstrom and Wal-Mart, and of course they’re all over the map when it comes to big retailers; Nordstrom profiles a bit more like Coach and Kate Spade in terms of clientele, but they’re a big department store, so not really comparable at all. Nordstrom’s growth, though, is expected to come from the Nordstrom Rack outlet stores, with same-store sales estimates for the entire company at 3.3 percent, but a 1.2 percent decline expected in the full-line sales, according to Thomson Reuters data.
Either way, investors will be keeping an eye on margins at Nordstrom’s and Tiffany & Co (which reports later in the month). Nordstrom, in its last release, said it expected a 30 to 50-basis point decline in gross profits for fiscal 2014 (which ends early 2015), compared with 10 to 30-basis points prior to its May earnings release, and its earnings before interest and taxes fell to 7.9 percent in the May quarter 2014, from 8.7 percent a year earlier. While some companies this quarter talked of margin pressures as a result of rising prices, with retailers it seems more to be their inability to get away from hefty discounting to bring consumers into the stores.
Wal-Mart is a trickier case. Sozzi, for his part, believes the company could fall short of results if inventory growth continued to grow faster than net sales, and if they relied heavily on clearance zones to move inventory, that will hurt overall margins as well. The company forecast second-quarter profit below analysts’ expectations in May, and so investors are going to see if there’s any sign that its execution is changing now that it has appointed a new CEO and new head of online business. The company has seen margins slipping as well, as its pre-tax, pre-interest and depreciation margins dipped from the high 7s between 2011 and 2013 to 7.5 percent in 2014, and it’s trailing the S&P badly in the last several years.